Whether you are completing the streamlined compliance procedures or preparing your annual tax return, if you have foreign income, you must use exchange rates. But which rate or source of rates should you use? Can you use multiple rates in the same return? Can you change rates each year to get the lowest tax? Below is a brief summary of the rules.

Form 8938 (FATCA) and FinCEN 114 (FBAR) are information returns. They provide the US government with information about your assets but do not affect your taxable income. So the exchange rate used on those forms does not affect the tax you pay.

Schedule B of your tax return is where you report the interest or ordinary dividends you received during the year, including interest or ordinary dividends from your foreign accounts. The amounts reported on Schedule B are included in your taxable income. So the exchange rate you use can have an impact on the tax you pay.

Form 8938 and FinCEN 114: Form 8938 (FATCA) and FinCEN 114 (FBAR) offer no flexibility. The instructions require the use of US Treasury Reporting Rates of Exchange unless the Treasury does not provide a rate for your particular currency. You can use another published exchange rate only if no exchange rate is provided by the Treasury. Whatever exchange rate source you use, you must use the rate in effect on the last day of the tax year for all amounts on the form, even those amounts, such as the maximum value, that may not have occurred on the last day of the year.

1040 Schedule B: The instructions Schedule B allow the use of exchange rates from any published source. This is true even if you filed an 8938 and/or FBAR using the Treasury rates. You must use the rate (spot, average, etc.) that is most applicable to the situation. For example, in the case of interest earned over the year, an average rate would be a correct choice. However, whatever source and scheme are used, they must be used consistently, year over year. The IRS will not allow changing rates and sources in each year to obtain the most advantageous exchange rate.

Yes, you have rights! And when confronting the IRS, it is important to know your rights. Do you know yours? Chances are you don’t. Some estimate that as many as 46% of people believe that they don’t have rights when dealing with the IRS and most people don’t know all of their rights.

Everyone in the United States and possibly the world has heard of the Bill of Rights in the United States Constitution. As a taxpayer you also have a set of rights. They are not in the constitution and they don’t teach you about them in school, which may explain why they have been hard to find. They have been buried in the Tax Code where only the brave venture without guidance. Recently the IRS announced a “Taxpayer Bill of Rights.” The Taxpayer Bill of Rights takes the taxpayer rights that are granted in the Internal Revenue Code and gathers then together in one place for easy reference. So without further ado, here’s what you have a right to expect from the IRS:

The Right to Be Informed

You have the right to know what you need to do to comply with the tax laws. You are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. You have the right to be informed of IRS decisions about you tax accounts and to receive clear explanations of the outcomes.

The Right to Quality Service

You have the right to receive prompt, courteous, and professional assistance in you dealings with the IRS, to be spoken to in a way you can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.

The Right to Pay No More than the Correct Amount of Tax

The Right to Challenge the IRS’s Position and Be Heard

You have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider your timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with your position.

The Right to Appeal an IRS Decision in an Independent Forum

You are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. You generally have the right to take your case to court.

The Right to Finality

You have the right to know the maximum amount of time you have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. You have the right to know when the IRS has finished an audit.

The Right to Privacy

Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing.

The Right to Confidentiality

You have the right to expect that any information you provide to the IRS will not be disclosed unless authorized by the you or by law. You have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose your return information.

The Right to Retain Representation

You have the right to retain an authorized representative of your choice to represent you in their dealings with the IRS. You have the right to seek assistance from a Low Income Taxpayer Clinic if you cannot afford representation.

The Right to a Fair and Just Tax System

You have the right to expect the tax system to consider facts and circumstances that might affect your underlying liabilities, ability to pay, or ability to provide information timely. You have the right to receive assistance from the Taxpayer Advocate Service if you are experiencing financial difficulty or if the IRS has not resolved you tax issues properly and timely through its normal channels.

IRS agents are trained to seem very friendly and develop rapport with you. They will make it sound like the audit is very simple and nothing to worry about. As a result having a lawyer will be a waste of time. Nothing could be further from the truth. The fact is that a good lawyer will have the audit conducted at their office. While the audit is going on, the lawyer will have only occasional contact with the revenue officer to answer questions and provide documents. Our flat fee pricing reflects this reality. The most important part of the audit actually happens before the revenue officer arrives. At Tax Help by Judy we audit your returns before the IRS does. After that, we can tell you if there are any weaknesses in your returns and get all of the documentation needed to support your return prepared ahead of time. We can also prepare (but not file) an amended return, letting the revenue officer know what changes we think need to be made. With Tax Help By Judy, you’ll know the likely outcome of the audit before it even starts.

CPAs are great at accounting and even filing returns. But CPAs are not usually familiar with the ins and outs of the rules and procedures of representing taxpayers before the IRS. Additionally, CPAs have not been trained to interpret case law that decides what the tax law really means. And CPAs haven’t been trained to make legal arguments. For all of those reasons, a tax attorney is a better choice. For more on this topic see our page on the Tax Attorney Advantage.